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Financial Distress and the Business Cycle

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Author Info

  • Suarez, Javier
  • Sussman, Oren

Abstract

In this paper we argue that firms' financial distress should play a greater role in the macroeconomic analysis of the business cycle. We provide a nontechnical account of a general equilibrium model that exhibits financially-driven equilibrium cycles. We show that the empirical evidence is widely supportive of the key hypothesis and implications of our approach. We use the model in order to evaluate the effects of several policy measures. It turns out that deepening the market for second-hand capital goods, subsidizing the interest payments of companies which start up when financial conditions are tight, and bailing out some companies in default can indeed "stabilize" the economy. By way of generalization, we may say that the policy reaction to a financially driven bust should be accommodating. Copyright 1999 by Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 15 (1999)
Issue (Month): 3 (Autumn)
Pages: 39-51

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Handle: RePEc:oup:oxford:v:15:y:1999:i:3:p:39-51

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Web page: http://oxrep.oupjournals.org/

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Cited by:
  1. Claudio Borio, 2011. "Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward," BIS Working Papers 354, Bank for International Settlements.
  2. Claudio Borio & Mathias Drehmann, 2009. "Towards an Operational Framework for Financial Stability: "Fuzzy" Measurement and its Consequences," Working Papers Central Bank of Chile 544, Central Bank of Chile.
  3. Santiago Fernández de Lis & Jorge Martínez Pagés & Jesús Saurina, 2000. "Credit Growth, Problem Loans and Credit Risk Provisioning in Spain," Banco de Espa�a Working Papers 0018, Banco de Espa�a.
  4. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive wp_605, Levy Economics Institute.
  5. Franz R. Hahn, . "Macroprudential Financial Regulation and Monetary Policy," WIFO Working Papers 154, WIFO.

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